Friday, June 1, 2007

Saving money for retirement - Part IV

As previously stated, due to an uncertain future of tax rates, health insurance costs, college costs for kids, changing government regulations, and increased life expectancies, I believe it is near impossible to predict how much we'll actually need to save for retirement. Therefore, the amount you need is A WHOLE LOT! That's all you need to know - you need A LOT. And if you need a large pile of money for retirement, you need to start saving now. The sooner you make the pile of money "sorta big," the bigger it will be upon retirement.

Here is the fourth pitfall that I believe you need to avoid on your road to retirement:

4. Accumulating credit card debt/not getting credit card debt paid off.

Every dollar of credit card debt you have means you're paying interest instead of investing for your retirement. Hopefully you at least own nice things as a reward for being in credit card debt! This is probably the most damaging thing you can do to your financial future. If you end up spending several years to get out of credit card debt, that's several years you could have been investing. And as I showed here, every year counts.

If you are in massive credit card debt and are looking for a way to lessen the blow of those interest charges, I would actually recommend procuring some 0% interest balance transfer credit cards. Yes, get more credit cards! But this time, you're doing it for a good reason. Five Cent Nickel and My Money Blog both have extensive sections on 0% balance transfers. Transfer credit card debt to these, and you'll shield yourself from further interest. Use the money you would have been paying to interest to pay down the principal. DO NOT go spend that money elsewhere!

I would also recommend, if possible, opening up a Home Equity Line of Credit. I pay 8.24% on my HELOC right now, and that is not only lower than the interest rate on most credit cards, but the interest is tax deductible (to me, at least, since we itemize). I would recommend this route if you are unable to open up additional lines of credit that offer 0% balance transfers. I would even recommend it if you don't itemize, since the interest rate will likely be lower than your credit card interest rate. But again, if you are successful in applying for new 0% balance transfer credit cards, that would be the more economical route to go.

Finally, if you cannot discipline yourself to avoid spending on your credit card, get rid of that card! Cut them all up. Yes, forgo those free points, cash back, or airline miles your card pays you. Forget those perks - you are spending more money on interest than you're receiving back in rewards. And I'm speaking to the people that eventually get that debt paid down to zero, only to rack it up again. Without serious discipline, you may fall in the same debt trap you just dug yourself out of. Ditch the cards if you can't control yourself.


SavingDiva said...

Very good advice about getting rid of your credit cards. However, it is hard to give up the rewards cards...I love getting $20 every few months...but I know that I spend too much when I use my cards!

Q said...

I say keep the cards if you have the discipline not to overspend. My wife and I have Discover cards where we get cash back. They are great - we have the discipline required to carry credit cards.

But if you don't, I say make the hard choice and get rid of them.

alex said...

Hey Q,
Do you have problems with people taking the discover card? I never seem to see any Discover stickers on the doors of shops and restaurants, of course I am not really looking.

Plus6 said...

Well written "Saving for Retirement" series Q. I just got done reading through the series and found it interesting and insightful.

Q at $1 Million said...


Some places don't take Discover, but I also hold a Visa, MC, and an American Express. As Teddy Roosevelt once said, "CHARGE!"

My wife brought the Discover card into our marriage back in 2000. I was like, "Discover? Ewwwww! You really want me to use that?"

But it has worked out very well for us. You get 1% back, and then certain rewards give you $25 for every $20 you redeem.

So when it's time to redeem $60, I get $75 in Bed Bath and Beyond gift certs. I bought all new BBQ tools for the lake.